Slump In Housing Starts: 'Extremely Noisy' Numbers Indicate Demand For New Homes Dipping

The number of homebuilding projects started in January plunged, hitting the lowest rate since August, with the Midwest region lagging the most.

Data from the U.S. census bureau on Friday showed housing starts fell by 14.8% in January, rocked by a chunky 35.8% fall in projects started on multifamily dwellings. Starts on single family homes fell by 4.7%.

The move doesn’t necessarily represent a slump in demand for new homes — the most recent new homes sales data showed that sales of single family homes rose 8% in December, which followed a 9% drop in November.

Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, said that new housing starts data didn’t alter the broader upward trend that the data for single family homes have shown over the longer term.

“The monthly housing starts numbers are extremely noisy and prone to revisions, but the bigger picture is that single-family starts are trending higher,” he said.

Indeed, the reasons behind the drop could have been due to the weather. The data showed that the biggest slump in new starts was in the Midwest, which fell 30%. During January, this region was one of the worst hit by winter storms, with high winds and blizzards reported for several days.

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Mortgage Rates Ticking Higher

However, it would come as little surprise if home sales did continue to fall. Both new home sales and purchases of existing properties have been trending lower as high interest rates have pushed mortgage higher, leading to affordability issues for many potential buyers.

Hopes of Federal Reserve rate cuts early in 2024 dragged mortgage rates from their October highs, but persistently sticky inflation readings have seen these hopes fade. Mortgage rates have turned higher again in the past few weeks.

Data from Freddie Mac released Thursday showed that in the week to Feb. 15, the average rate on a 30-year mortgage climbed to 6.77%, up from 6.64% in the previous week.

Meanwhile, data from the Mortgage Bankers Association last week showed that applications for home loans fell by 2.3% in the week ending Feb. 9.

“On the heels of consumer prices rising more than expected, mortgage rates increased this week,” Sam Khater, Freddie Mac's chief economist.

“The economy has been performing well so far this year and rates may stay higher for longer, potentially slowing the spring homebuying season.”

Housebuilders And Merchants Lagging

The recent data that indicate a slowing in house buying activity, have had a negative impact on housebuilders — despite some decent fourth quarter results in the sector.

Shares in D.R. Horton (NYSE:DHI), the biggest housebuilder in the U.S., are down 5.8% so far this year, while close rival Lennar (NYSE:LEN) is up just 2%. Shares in Pulte Group (NYSE:PMH), which makes high-end homes, are down 0.8%, while Toll Brothers (NYSE:TOL) shares are fractionally higher.

This biggest hit on sales has come in the existing homes sector of the market, with sales moving steadily lower since February last year.

“Existing home sales are tracking near the lowest levels since 1995, which negatively impacts turnover in related home improvement purchases,” said analysts at Bank of America.

This could have an impact on stocks such as Home Depot (NYSE:HD) in the coming months. So far in 2024, shares in HD are up 5%.

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Image generated with artificial intelligence via MidJourney.